Sarkozy Aims to Overhaul French Wealth, Asset Taxes

French President Nicolas Sarkozy aims to overhaul French wealth and estate taxes, opening up a political minefield in the months before 2012 elections.

The review will be complete by June 2011, and will be done as part of a study into aligning taxes with those of Germany, Europe’s biggest economy and France’s largest trading partner, government spokesman Luc Chatel told reporters today.

Sarkozy is being pressured on two fronts, by members of his own party who want to abolish the wealth tax, and by public opinion, which backs the levy and opposes a ceiling Sarkozy passed on total household tax liabilities. Sarkozy’s popularity is near record lows over plans to raise the retirement age and cut the budget deficit.

“Getting rid of the wealth tax entirely is almost impossible, both because it’s an ideological tax and because it would be difficult to replace the revenue,” said Samuel- Frederic Serviere, a researcher at Ifrap, a Paris-based institute that favors free markets. “Sarkozy is in a bit of an impossible bind on this one.”

Lawmakers from Sarkozy’s Union for a Popular Movement party this week presented an amendment that would abolish both the wealth tax and the tax shield, which limits personal taxes to 50 percent of income. To make up for the lost revenue, the measure called for new taxes on passive income, such as dividends, as well as a higher income-tax band for those with high salaries.

The amendment was dropped after Budget Minister Francois Baroin said yesterday during parliamentary debate that the government will confront the issue next year.

‘Not Taboo’

“It’s an open question, it’s not taboo,” Baroin said. “It must be done with a global approach.”

France is the only member of the Group of Seven industrialized countries to have a wealth tax. Germany abolished its own in 1997. Denmark and the Netherlands have also recently abolished their versions of the tax.

The tax, Impot de Solidarite sur la Fortune, or ISF, was introduced by the late Socialist President Francois Mitterrand after his 1981 election. It applies to the net wealth over 790,000 euros ($1.1 million) of French residents. Holdings including real estate, securities, racehorses and jewelry, and the French-based assets of non-residents are eligible to be taxed. Art and antiques are exempt.

The tax will raise 3.3 billion euros this year, up from 3.1 billion in 2009, or about 1.3 percent of total government revenue, according to the budget ministry. The number of households subject to the tax rose to 562,000 from 539,000, or about 1.5 percent of households.

Tax Shield

Sarkozy, who has blamed the tax for forcing wealthy French to move overseas, introduced the tax shield after his 2007 election. The shield, which will refund 679 million euros to taxpayers this year, has been denounced by the opposition Socialist Party as a gift to the rich.

A BVA poll for Canal+ television last week showed that 71 percent want the tax shield abolished, while 64 percent are against abolishing the ISF. The poll questioned 1,117 people on Oct. 5 and 6. No margin of error was given.

Chatel wouldn’t say what changes the government would consider. “The goal is to open a reflection,” he said. “You don’t establish the final decision before you start.”

Sarkozy said in July that he wants to align French taxes with Germany, which has emerged from the recession faster than France and with a lower budget deficit.

With his 2012 re-election campaign looming, a possible outcome would be for Sarkozy to keep the ISF while removing principal residences from its calculation, Serviere said. That would get rid of the tax’s most distortive effect -- modest wage earners who are subject to the ISF because they own property -- and enable Sarkozy to get rid of the tax shield.

Even that move would force Sarkozy to increase other taxes.

“Adding an income-tax band of 45 percent on people earning more than 100,000 euros, as the UMP legislators suggest, would only bring in a few hundred thousand euros,” Serviere said.

French President Nicolas Sarkozy aims to overhaul French wealth and estate taxes, opening up a political minefield in the months before 2012 elections.The review will be complete by June 2011, and will be done as part of a study into aligning taxes with those of Germany,...